Test bank for using financial accounting information the alternative to debits and credits 8th edition by porter

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Chapter 1: Accounting as a Form of Communication
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Question 1

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Question Trailways Busline is an example of a
Answer
producer
supplier
retailer
service provider
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Question 2

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Question All of the following are examples of manufacturers except:
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Whirlpool
Boeing
Amazon.com
Ford
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Question 3

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Question The three forms of business entities are:
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Government, cooperatives, and philanthropic organizations
Financing, investing, and operating
Sole proprietorships, partnerships, and corporations
Wholesaler, manufacturer, and retailer
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Question 4

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Question Which of the following statements would be true if you own stock in a company?
Answer
You are an owner of the retained earnings and capital stock of the company.
You have a claim to the assets of the business
You have the right to receive interest on an annual basis.
You have the right to a portion of the company’s revenues each accounting period.

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Question 5

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Question Which of the following statements best describes the term “revenues”?
Answer
Revenues represent an outflow of assets resulting from the sale of goods or services.
Revenues represent assets received from the sale of products or services.
Revenues represent assets used or consumed in the sale of products or services.
Revenues represent the dollar amount of bonds sold to the public.
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Question 6

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Question Which one of the following events involves a liability for a business?
Answer
Loans to be repaid to banks
Inventories purchased for cash
Amounts invested by the owners
Stock sold to the general public
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Question 7

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Question Which of the following best describes the term “expenses”?
Answer
The amount of total profits earned by a business since it began operations.
The amount of interest or claim that the owners have in the business.
The future economic resources of a business entity.
The outflow of assets resulting from the sale of goods and services.
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Question 8

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Question The inflow of assets resulting from the sale of products and services is called a(n)
Answer
asset
liability

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revenue
expense
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Question 9

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Question The costs of doing business through the sale of goods and services are called
Answer

Net income
Expenses
Revenues
Dividends
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Question 10

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Question Which of the following best describes the term “assets”?
Answer
The amount of total profits earned by a business since it began operations.
The amount of interest or claim that the owners have in the business.
The economic resources of a business entity.
The cumulative profits earned by a business less any dividends distributed.
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Question 11

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Question Which one of the following business decisions will least likely require financial information?
Answer
The National Bank is reviewing the loan application from Petra’s Restaurant.
Petra’s Restaurant is attempting to sell its stock to the public.
The labor union representing Winn’s Fitness Spa employees is negotiating a pay raise as part of a new labor agreement.
Petra’s Restaurant management is deciding whether to wash its catering vans today or tomorrow.
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Question 12

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Question Which of the following would be internal users of accounting information?
Answer
Customers and vendors
Employees and managers
Government and banks
Employees and customers
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Question 13

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Question Which of the following would be classified as external users of financial statements?
Answer
Stockholders and management of the company
The controller of the company and a company's stockholders
The company's marketing managers
The creditors and stockholders of the company
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Question 14

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Question Which one of the following is not an external user of financial information?
Answer

Company management
Internal Revenue Service
Creditors
Stockholders
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Question 15

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Question Clip Joint Company is ready to sell its bonds. Which one of the following financial questions is most relevant to the issue of
the bonds and that investors will most likely want answered before they purchase the bonds?
Answer
How many product lines did Clip Joint Company have last year?
What will be Clip Joint Company’s cost to start operations in another city?
How much debt does Clip Joint Company already have?
Will Clip Joint Company pay dividends?
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Question 16

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Question What is the name of the branch of accounting concerned with providing managers and administrators with information to
facilitate the planning and control of business operations?
Answer
Management accounting
Auditing
Financial accounting
Bookkeeping
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Question 17

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Question Which of the following invests funds into a business and is considered an owner?
Answer
Stockholders
Creditors

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Bankers
Lenders
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Question 18

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Question Which one of the following is not one of the three activities included in the definition of accounting?
Answer
Communicating
Identifying
Measuring
Operating
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Question 19

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Question Which one of the following is not an external user of financial statements?
Answer
Suppliers
Creditors
Investors
The company’s controller
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Question 20

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Question Which one of the following is least likely to be a user of financial information of a grocery store?
Answer
The manager of the grocery store.
The supplier of milk to the grocery store.
A stockbroker looking for a possible investment.
A customer at the grocery store.
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Question 21

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Question Which one of the following groups is considered an internal user of financial statements?
Answer
A bank reviewing a loan application from a corporation.
The labor union representing employees of a company that is involved in labor negotiations
The financial analysts for a brokerage firm who are preparing recommendations for the firm’s brokers on companies in a
certain industry,
Factory managers that supervise production line workers.
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Question 22

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Question Which of the following is an organization that lends funds to a business entity and expects repayment of the funds?

Answer
A partner
A stockholder
An owner
A creditor
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Question 23

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Question You are a potential stockholder and are concerned that a particular company you are ready to invest in might have too much
debt. Which financial statement would provide you information needed in order to evaluate your concern?
Answer
Balance sheet
Income statement
Statement of retained earnings
Statement of public accounting
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Question 24

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Question Which financial statement would you analyze to determine if a company distributed any of its profits to its shareholders?
Answer
Balance Sheet
Statement of Retained Earnings
Income Statement
Statement of Public Accounting
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Question 25

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Question Which financial statement would you refer to in order to determine whether a company owed funds to creditors?
Answer
Balance Sheet
Statement of Retained Earnings
Income Statement
Statement of Public Accounting

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Question 26

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Question Which one of the following is an economic obligation for a business entity?
Answer
Salaries paid to employees for services rendered
Amounts owed to creditors

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Materials used in manufacturing products
Payment of rent for the next year
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Question 27

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Question Which one of the following is a correct expression of the accounting equation?
Answer
Assets + Liabilities = Owners’ Equity
Assets = Liabilities - Owners’ Equity
Assets + Owners’ Equity = Liabilities
Assets = Liabilities + Owners’ Equity
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Question 28

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Question How is the balance sheet linked to the other financial statements?
Answer
The amount of retained earnings reported on the balance sheet is equal to net income.
Retained earnings is added to total assets and reported on the balance sheet.
Net income increases retained earnings on the statement of retained earnings, which ultimately increases retained
earnings on the balance sheet.
There is no link between the balance sheet and other statements, as each contains different accounts and provides
different information.

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Question 29

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Question Which of the following is the correct date format for the financial statement heading?
Answer
Balance sheet for the year ended June 30, 2014
Income statement at December 31, 2014
Balance sheet at December 31, 2014
Statement of retained earnings at December 31, 2014
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Question 30

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Question Which of the following best describes the term “retained earnings”?
Answer
The amount of total profits earned by a business since it began operations.
The amount of interest or claim that the owners have on the assets of the business.
The future economic resources of a business entity.
The cumulative profits earned by the business less any dividends distributed.
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Question 31

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Question Which one of the following items is correct concerning the time element of financial statements?
Answer
The balance sheet covers a period of time.
The statement of retained earnings explains changes during a particular period.
An income statement lists amounts at a specific point in time.
Both the income statement and the balance sheet cover a period of time.
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Question 32

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Question Which one of the following items appears on a balance sheet?
Answer
Accounts payable
Sales revenue
Utilities expense
Cost of goods sold
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Question 33

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Question Which one of the following financial statements reports an entity’s financial position at a specific date?
Answer
Balance sheet
Statement of retained earnings
Income statement
Both the income statement and the balance sheet

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Question 34

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Question Which one of the following correctly represents one of the basic financial statement models?
Answer
Assets - Liabilities = Net Income
Assets + Liabilities = Owners’ Equity
Revenues + Expenses = Net Income
Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings
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Question 35

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Question Which of the following statements is true?
Answer
Profits distributed to the creditors are called dividends.
The balance sheet shows the assets, liabilities, and profits of a company.

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Dividends are an expense, and are reported on the income statement as a deduction from net income.
The income statement reports the revenues and expenses of a company.
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Question 36

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Question Which of the following terms best describes a distribution of the net income of a business to its owners?
Answer
Revenue
Dividends
Earnings
Monetary unit
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Question 37

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Question Which statement summarizes the income earned and the dividends paid?
Answer
Statement of cash flows
Statement of retained earnings
Balance sheet
Income statement
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Question 38

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Question Harbor City Corporation’s end-of-year balance sheet consisted of the following amounts:
Cash

Property, plant, and equipment
Capital stock
Retained earnings

$ 15,000Accounts receivable
70,000Long-term debt
100,000Accounts payable
?Inventory

$ 50,000
40,000
20,000
35,000

What amount should Harbor City report on its balance sheet for total assets?
Answer
$110,000
$155,000
$170,000
$190,000
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$15,000+$50,000+$70,000+$35,000 = $170,000
$15,000+$50,000+$70,000+$35,000 = $170,000
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Question 39

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Question Leary Corporation’s end-of-year balance sheet consisted of the following amounts:
Cash
Property, plant, and equipment
Capital stock
Retained earnings

$ 25,000Accounts receivable
69,000Long-term debt
100,000Accounts payable
?Inventory

$ 48,000
40,000
20,000
33,000

What amount should Leary report on its balance sheet for total assets?
Answer
$175,000
$141,000
$195,000
$194,000
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$25,000+$48,000+$69,000+$33,000 = $175,000
$25,000+$48,000+$69,000+$33,000 = $175,000
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Question 40

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Question Harbor City Corporation’s end-of-year balance sheet consisted of the following amounts:
Cash
Property, plant, and equipment
Capital stock
Retained earnings

$ 15,000Accounts receivable
70,000Long-term debt
100,000Accounts payable
?Inventory

$ 50,000
40,000
20,000

35,000

What is Harbor City’s retained earnings balance at the end of the current year?
Answer
$10,000
$110,000
$160,000
$170,000
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Assets: $15,000+$70,000+$50,000+$35,000 = $170,000
Liabilities: $40,000+$20,000 = $60,000
Owners’ equity: $170,000-$60,000 = $110,000
Retained earnings: $110,000-$100,000 = $10,000
Assets: $15,000+$70,000+$50,000+$35,000 = $170,000
Liabilities: $40,000+$20,000 = $60,000
Owners’ equity: $170,000-$60,000 = $110,000
Retained earnings: $110,000-$100,000 = $10,000
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Question 41

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Question Leary Corporation’s end-of-year balance sheet consisted of the following amounts:
Cash
Property, plant, and equipment

$ 25,000Accounts receivable
69,000Long-term debt

$ 46,000
41,000

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Capital stock
Retained earnings

107,000Accounts payable
?Inventory

22,000
33,000

What is Leary’s retained earnings balance at the end of the current year?
Answer
$10,000
$3,000
$66,000
$110,000

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Assets: $25,000+$69,000+$46,000+$33,000 = $173,000
Liabilities: $41,000+$22,000 = $63,000
Owners’ equity: $173,000-$63,000 = $110,000
Retained earnings: $110,000-$107,000 = $3,000
Assets: $25,000+$69,000+$46,000+$33,000 = $173,000
Liabilities: $41,000+$22,000 = $63,000
Owners’ equity: $173,000-$63,000 = $110,000
Retained earnings: $110,000-$107,000 = $3,000
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Question 42

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Question Leary Corporation’s end-of-year balance sheet consisted of the following amounts:
Cash
Property, plant & equipment
Capital stock
Retained earnings

$ 25,000Accounts receivable
69,000Long-term debt
107,000Accounts payable
?Inventory

$ 46,000
41,000
22,000
33,000

What is Leary’s total liabilities balance at the end of the current year?
Answer
$3,000
$110,000
$63,000
$173,000
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Assets: $25,000+$69,000+$46,000+$33,000 = $173,000
Liabilities: $41,000+$22,000 = $63,000
Owners’ equity: $173,000-$63,000 = $110,000
Retained earnings: $110,000-$107,000 = $3,000
Assets: $25,000+$69,000+$46,000+$33,000 = $173,000
Liabilities: $41,000+$22,000 = $63,000
Owners’ equity: $173,000-$63,000 = $110,000
Retained earnings: $110,000-$107,000 = $3,000
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Question 43

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Question Leary Corporation’s end-of-year balance sheet consisted of the following amounts:
$ 25,000Accounts receivable
69,000Long-term debt
107,000Accounts payable
?Inventory

Cash
Property, plant & equipment
Capital stock
Retained earnings

$ 46,000
41,000
22,000
33,000

What is Leary’s owners’ equity balance at the end of the current year?
Answer
$3,000
$110,000

$63,000
$173,000
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Assets: $25,000+$69,000+$46,000+$33,000 = $173,000
Liabilities: $41,000+$22,000 = $63,000
Owners’ equity: $173,000-$63,000 = $110,000
Retained earnings: $110,000-$107,000 = $3,000
Assets: $25,000+$69,000+$46,000+$33,000 = $173,000
Liabilities: $41,000+$22,000 = $63,000
Owners’ equity: $173,000-$63,000 = $110,000
Retained earnings: $110,000-$107,000 = $3,000
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Question 44

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Question Las Palmas Company reported the following items on its financial statements for the year ending December 31, 2014:
Sales
Salary expense
Dividends

$ 560,000Cost of goods sold
40,000Interest expense
20,000Income tax expense

$400,000
30,000
25,000

The income statement for Las Palmas will report net income for the current year in the amount of
Answer
$ 45,000
$ 65,000
$ 85,000
$ 465,000
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$560,000-$400,000-$40,000-$30,000-$25,000 = $65,000
$560,000-$400,000-$40,000-$30,000-$25,000 = $65,000
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Question 45

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Question Las Palmas Company reported the following items on its financial statements for the year ending December 31, 2014:
Sales
Salary expense
Dividends

$ 560,000Cost of goods sold
40,000Interest expense
20,000Income tax expense

$400,000
30,000
25,000


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How much will be reported as retained earnings on Las Palmas’ balance sheet at December 31, 2014, if this is the first year of
operations?
Answer
$ 45,000
$ 65,000
$ 85,000
Not enough information is provided.
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Net income: $560,000-$400,000-$40,000-$30,000-$25,000 = $65,000
Retained earnings: $65,000-$20,000 = $45,000

Net income: $560,000-$400,000-$40,000-$30,000-$25,000 = $65,000
Retained earnings: $65,000-$20,000 = $45,000
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Question 46

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Question Lewis Corporation reported the following information for the year ended December 31, 2014:
Net income
Dividends
Retained earnings at December 31, 2014

$ 10,000
6,000
25,000

What was the balance of Lewis’ retained earnings at January 1, 2014?
Answer
$21,000
$29,000
$31,000
$35,000
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$25,000+$6,000-$10,000 = $21,000
$25,000+$6,000-$10,000 = $21,000
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Question 47

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Question Lewis Corporation reported the following information for the year ended December 31, 2014:
Net income
Dividends
Retained earnings at December 31, 2014

$ 10,000
6,000
25,000

What was the economic effect of the payment of Lewis’ dividends?
Answer
The dividend reduced net income for 2014.
The dividend should be equal to net income if the company’s accounting equation is in balance.
The dividends reduce total retained earnings for the year.

The dividends must be paid whenever Raymond Corp. reports net income.
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Question 48

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Question Volt Corp. reported the following information for the year ended December 31, 2014:
Revenues
Expenses
Retained earnings at December 31, 2013
Retained earnings at December 31, 2014

$ 50,000
20,000
100,000
105,000

How much was paid out in dividends by Volt in 2014?
Answer
$ 20,000
$ 25,000
$ 30,000
$ 50,000

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$100,000+$50,000-$20,000-X = $105,000
X = $25,000
$100,000+$50,000-$20,000-X = $105,000
X = $25,000
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Question 49

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Question Mobile Power Corp. reported the following information for the year ended December 31, 2014.
Revenue
Expenses
Dividends
Retained earnings at December 31, 2014

$ 40,000
23,000
10,000
175,000

What was the retained earnings balance for Mobile Power at December 31, 2013?
Answer
$ 165,000
$ 168,000
$ 182,000
$ 192,000
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X + $17,000 - $10,000 = $175,000
X = $168,000
X + $17,000 - $10,000 = $175,000
X = $168,000
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Question 50

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Question Native Dave’s Consultants had the following balance sheet amounts at the beginning of the year:
Total assets

Total owner's equity

$400,000
150,000

During the year, total assets increased by $100,000 and total liabilities increased by $40,000. The company also paid $30,000 in
dividends. No other transactions occurred except revenues and expenses. How much is net income for the year?
Answer
$30,000
$60,000
$70,000
$90,000
Correct Feedback

Assets: $400,000+$100,000 = $500,000
Liabilities: ($400,000-$150,000)+$40,000 = $290,000
Owners’ Equity at Year End: $500,000-$290,000 = $210,000
Net Income: $210,000-$150,000+30,000 = $90,000
Assets: $400,000+$100,000 = $500,000
Liabilities: ($400,000-$150,000)+$40,000 = $290,000
Owners’ Equity at Year End: $500,000-$290,000 = $210,000
Net Income: $210,000-$150,000+30,000 = $90,000

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Question 51

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Question On January 1, 2014, A-Best Company's balance in retained earnings was $70,000. At the end of the year, December 31,
2014, the balance in retained earnings was $94,000. During 2014, the company earned net income of $40,000. How much were
dividends?
Answer
$16,000
$24,000
$40,000
$64,000
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$70,000+$40,000-$94,000 = $16,000
$70,000+$40,000-$94,000 = $16,000
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Question 52

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Question On January 1, 2014, Francisco Company's balance in retained earnings was $70,000. During 2014, the company earned net
income of $43,000 and paid $15,000 in dividends. Calculate the retained earnings balance at December 31, 2014.
Answer
$42,000
$90,000
$98,000
$113,000
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$70,000+$43,000-$15,000 = $98,000
$70,000+$43,000-$15,000 = $98,000
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Question 53

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Question The following information is provided by the Ferrara Corporation:
Beginning retained earnings
Ending retained earnings
Dividends declared and paid

Revenue

$ 50,000
70,000
10,000
50,000

What is the net income for Ferrara Corp.?
Answer
$10,000
$20,000
$30,000
Unable to tell from the information provided.
Correct Feedback

$50,000+x-$10,000 = $70,000
x = $30,000
Incorrect Feedback $50,000+x-$10,000 = $70,000
x = $30,000
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Question 54

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Question The following information is provided by the Ferrara Corporation:
Beginning retained earnings
$ 50,000
Ending retained earnings
70,000
Dividends declared and paid
10,000
Revenue
50,000
Calculate Ferrara Corporation’s expenses.
Answer
$20,000
$30,000
$40,000
Cannot tell from the information provided.
Correct Feedback

$50,000+X-$10,000 = $70,000
X = $30,000 or Net Income
$50,000 (Revenue) - $30,000 (Net Income) = $20,000 Expenses
Incorrect Feedback $50,000+X-$10,000 = $70,000
X = $30,000 or Net Income
$50,000 (Revenue) - $30,000 (Net Income) = $20,000 Expenses
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Question 55

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Question If a company has $152,000 of revenues, declares and pays $55,000 in dividends, and has net income of $89,000, how much
were expenses for the year?
Answer
$ 8,000
$ 63,000
$144,000
Unable to determine the amount due to incomplete information.
Correct Feedback
Incorrect Feedback

$152,000 (Revenues) - $89,000 (Net Income) = $63,000 (Expenses)
$152,000 (Revenues) - $89,000 (Net Income) = $63,000 (Expenses)
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Question 56

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Question Aloha Company reports the following information at December 31, 2014:
Revenue
$150,000
Cash
30,000
Accounts payable
40,000
Dividends
10,000
Expenses
85,000
What is Aloha Company’s net income?
Answer
$ 15,000
$ 45,000
$ 55,000
$ 65,000
Correct Feedback $150,000 (Revenue) - $85,000 (Expenses) = $65,000 (Net Income)
Incorrect Feedback $150,000 (Revenue) - $85,000 (Expenses) = $65,000 (Net Income)
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Question 57

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Question Cerrato Company has assets of $350,000, liabilities of $130,000, and retained earnings of $180,000. How much is total
owners’ equity?
Answer
$ 40,000
$ 170,000
$ 220,000
$ 350,000
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$350,000 (Assets) - $130,000 (Liabilities) = $220,000 Owners’ Equity
$350,000 (Assets) - $130,000 (Liabilities) = $220,000 Owners’ Equity
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Question 58

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Question Gyro’s Shop reported a net loss of $15,000 and total expenses of $80,000. How much are total revenues?
Answer

$ 15,000
$ 65,000
$ 95,000
The answer cannot be determined from the information given.
Correct Feedback
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$80,000 Total Expenses + ($15,000) Net Loss = $65,000 Total Revenues
$80,000 Total Expenses + ($15,000) Net Loss = $65,000 Total Revenues
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Question 59

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Question Marcos Inc. had net income for 2014 of $40,000. It declared and paid a $3,500 cash dividend in 2014. If the company’s
retained earnings for the end of the year was $38,200, what was the company’s retained earnings balance at the beginning of 2014?
Answer
$81,700
$74,700
$5,300
$1,700
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Question 60

Multiple Choice

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Question Dimension Inc. had net income for 2014 of $24,000. It declared and paid a $13,000 cash dividend in 2014. If the company’s
retained earnings for the end of the year was $39,600, what was the company’s retained earnings balance at the beginning of 2014?
Answer
$28,600
$50,600
$76,600
$2,600
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Question 61

Multiple Choice

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Question At December 31, 2014, the accounting records of Whole Foods Corporation contain the following:
Accounts payable
Land

Capital stock
Building
Retained earnings

$16,000
$240,000
?
$180,000
$160,000

Accounts receivable
Cash
Equipment
Notes payable

If capital stock is $260,000, what is the December 31, 2014 cash balance?
Answer
$46,000
$506,000
$94,000

$40,000
?
$120,000
$190,000

Remove


Page 10 of 32

$86,000
Correct Feedback Cash + $40,000 + $120,000 + $180,000 + $240,000 = $16,000 + $260,000 + $160,000 + $190,000
Incorrect Feedback Cash + $40,000 + $120,000 + $180,000 + $240,000 = $16,000 + $260,000 + $160,000 + $190,000
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Question 62

Multiple Choice

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Question At December 31, 2014, the accounting records of Whole Foods Corporation contain the following:
Accounts payable
Land
Capital stock
Building
Retained earnings

$16,000
$240,000
?
$180,000
$160,000

Accounts receivable

Cash
Equipment
Notes payable

$40,000
?
$120,000
$190,000

If Cash is $26,000, what is the December 31, 2014 capital stock balance?
Answer
$272,000
$240,000
$220,000
$400,000
Correct Feedback $26,000 + $40,000 + $120,000 + $180,000 + $240,000 = $16,000 + $160,000 + $190,000 + Capital Stock
Incorrect Feedback $26,000 + $40,000 + $120,000 + $180,000 + $240,000 = $16,000 + $160,000 + $190,000 + Capital Stock
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Question 63

Multiple Choice

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Question Sawaddee Enterprises began the year with total assets of $450,000 and total liabilities of $230,000. If Sawaddee’s total

assets increased by $80,000 and its total liabilities increased by $57,000 during the year, what is the amount of Sawaddee’s owners’
equity at the end of the year?
Answer
$197,000
$543,000
$243,000
$220,000
Correct Feedback
Incorrect Feedback

($450,000 + $80,000) = ($230,000 + $57,000) + SE
($450,000 + $80,000) = ($230,000 + $57,000) + SE
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Question 64

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Question Sawaddee Enterprises began the year with total assets of $450,000 and total liabilities of $230,000. If Sawaddee total
liabilities increased by $31,000 and its owners’ equity decreased by $53,000 during the year, what was the amount of its total assets at
the end of the year?
Answer
$472,000
$242,000

$198,000
$428,000
Correct Feedback

A = ($230,000 + $31,000) + ($220,000* – $53,000) = $428,000

Incorrect Feedback

*Owners’ equity = $450,000 - $230,000
A = ($230,000 + $31,000) + ($220,000* – $53,000) = $428,000
*Owners’ equity = $450,000 - $230,000
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Question 65

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Question The natural progression in items from one statement to another and preparation of financial statements is best represented
by the following order:
Answer
Balance sheet and statement of cash flows > statement of retained earnings > income statement
Balance sheet and statement of cash flows > income statement > statement of retained earnings.
Statement of retained earnings > income statement > balance sheet and statement of cash flows
Income statement > statement of retained earnings > balance sheet and statement of cash flows

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Question 66

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Question All of the following are different expressions for net income except:
Answer
Profits
Excess of revenues over expenses
Capital
Earnings
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Question 67

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Question Sawaddee Enterprises began the year with total assets of $450,000 and total liabilities of $230,000. If Sawaddee’s total
assets doubled to $900,000 and its owners’ equity remained the same during the year, what was the amount of its total liabilities at the
end of the year?
Answer
$670,000
$680,000
$440,000
$900,000
Correct Feedback
Incorrect Feedback

$900,000 = L + $220,000
$900,000 = L + $220,000
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Page 11 of 32

Question 68

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Question The statement of retained earnings accomplishes which of the following?
Answer

It summarizes income earned and dividends paid over a single period of the business.
It accumulates all revenues for the year.
It summarizes the balance sheet accounts.
It summarizes the capital stock accounts over the life of the business.
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Question 69

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Question Which concept is the reason the dollar is used in the preparation of financial statements?
Answer
Going concern
Legal entity
Monetary unit
Time Period
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Question 70

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Question Which one of the following is an assumption made in the preparation of financial statements?
Answer
Financial statements are prepared for a specific entity that is distinct from the entity owners.
Financial statements are prepared assuming that inflation has a distinct effect on the monetary unit
Preparation of financial statements for a specific time period assumes that the balance sheet covers a period of time.
Market values are always assumed to be irrelevant when preparing financial statements.
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Question 71

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Question Why is the time period assumption required?
Answer
Inflation exists
External users of financial statements want statements that accurately reflect net income or earnings for a specific time
period.
The dollar is the monetary unit in the United States.
The federal government requires it.
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Question 72

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Question Which one of the following statements is true concerning assets?
Answer
They are recorded at market value and then adjusted for inflation.
They are recorded at market value for financial reporting purposes as historical cost may be arbitrary.
Accountants use the term historical cost to refer to the original cost of an asset.
Assets are measured using the time-period approach.
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Question 73

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Question Cranston Enterprises purchased land for $2,000,000 in 1999. In 2014, an independent appraiser assessed the value at

$4,400,000. What amount should appear on the financial statements in 2014 with respect to the land?
Answer
$2,000,000
$2,400,000
$4,400,000
Whatever amount the company believes is the best indicator of the true value of the land.
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Question 74

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Question Which of the following is a five-member body that has the authority from Congress to set standards for conducting audits?
Answer
FASB
SEC
PCAOB
AICPA
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Question 75

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Question Which the following organizations is primarily responsible for establishing GAAP today?
Answer
Financial Accounting Standards Board (FASB)
Securities and Exchange Commission (SEC)
Internal Revenue Service (IRS)
Federal Government
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Question 76

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Question Which of the following organizations is responsible for setting auditing standards followed by public accounting firms in
conducting independent audits of financial statements?
Answer
Financial Accounting Standards Board (FASB)
Securities and Exchange Commission (SEC)
Public Company Accounting Oversight Board (PCAOB)

International Accounting Standards Board (IASB)
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Question 77

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Question Which organization, in addition to the Financial Accounting Standards Board (FASB), occasionally issues authoritative rules
for financial statements?
Answer
The Accounting Profession
International Accounting Standards Board (IASB)
Securities and Exchange Commission (SEC)
Internal Revenue Service (IRS)
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Question 78

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Question The Securities and Exchange Commission (SEC) is concerned with
Answer
All companies in the United States regardless of size.
Companies that issue securities to the general public.
Accounting reports issued by government entities.
All domestic and international companies that issue accounting reports.
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Question 79

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Question To which of the following entities must a company report if it sells its stock on the organized stock market?
Answer
American Institute of Certified Public Accountants (AICPA)
American Accounting Association (AAA)
International Accounting Standards Board (IASB)
Securities and Exchange Commission (SEC)
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Question 80

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Question The reliability of the information in a company’s financial statements is the responsibility of which of the following?
Answer
The Securities and Exchange Commission (SEC)
The Certified Public Accountant in charge of the audit of the company’s financial statements
The company’s management
The stockholders of the company.
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Question 81

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Question In order for accounting information to be useful in making informed decisions, it must be

Answer
relevant
reliable
both relevant and reliable
nether relevant nor reliable
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Question 82

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Question The second step in the ethical decision-making model is to
Answer
List alternatives and evaluate the impact of each on those affected
Select the best alternative
Recognize an ethical dilemma
Analyze the key elements in the situation
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Question 83

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Question All of the following are important provisions of the Sarbanes-Oxley Act except:
Answer
The establishment of a new Public Company Accounting Oversight Board.
The requirement to prepare both FASB and IASB financial statements.
A requirement that the external auditors report directly to the company’s audit committee.
A clause to prohibit public accounting firms that audit a company from providing any other services that could impair their
ability to act independently in the course of their audit.
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Question 84

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Question When selecting between the best alternatives regarding an ethical dilemma in accounting all of the following should be
considered except:
Answer
which alternative provides the most relevant information.
which alternative provides the most accurate information.
which alternative provides the most neutral information.

which alternative provides the most profitable information.
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Question 85

True/False

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Question An auto repair company is an example of a manufacturer.
Answer
True
False
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Question 86

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Page 13 of 32

Question A department store is an example of a wholesaler.
Answer
True
False
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Question 87

True/False

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Question The Internal Revenue Service (IRS) is an external user that has the authority of the law to obtain certain accounting
information.
Answer
True
False
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Question 88

True/False

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Question A partnership is a business owned by two individuals; if three or more individuals organize a business, it must be established
as a corporation.
Answer
True
False
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Question 89

True/False

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Question Business entities and non-business entities are both organized to earn a profit.
Answer
True
False
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Question 90

True/False

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Question Someone to whom a company has a debt is known as an investor.
Answer
True
False
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Question 91

True/False

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Question All assets are tangible in nature.
Answer
True
False
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Question 92

True/False

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Question A liability is a future economic benefit to a business.
Answer
True
False
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Question 93

True/False

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Question An expense is an inflow of assets resulting from the sale of goods and services.
Answer
True
False

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Question 94

True/False

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Question Capital stock indicates the owners’ contributions to a partnership.
Answer
True
False
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Question 95

True/False

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Question Financial accounting is the branch of accounting concerned with communication with internal management.
Answer

True
False
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Question 96

True/False

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Question External users of accounting information include present and potential stockholders, bankers and other creditors, and
management.
Answer
True
False
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Question 97

True/False

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Question Bondholders are internal users of company’s accounting information.
Answer
True
False
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Page 14 of 32

Question 98

True/False

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Question The income statement is sometimes called the statement of financial position.
Answer
True
False
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Question 99

True/False

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Question The balance sheet is a statement that summarizes revenues and expenses for a period.
Answer
True
False
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Question 100

True/False

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Question Assets may be used to satisfy business obligations and to carry on business operations.
Answer
True
False
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Question 101

True/False

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Question The amount of earnings distributed to stockholders can be found in the income statement.
Answer
True
False
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Question 102

True/False

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Question Profits from operating activities distributed to business owners are called dividends.
Answer
True
False
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Question 103

True/False

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Question An entity's assets come from three primary sources: creditors, investors, and profits retained in the business.
Answer
True
False
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Question 104

True/False

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Question The balance sheet is linked to the retained earnings statement by the ending retained earnings balance.
Answer
True
False

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Question 105

True/False

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Question A balance sheet provides information at one specific point in time, while the other basic financial statements provide
information on activities that occur over a period of time.
Answer
True
False
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Question 106

True/False

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Question When an entity's revenues exceed its expenses for a period of time, the entity will report a net loss.

Answer
True
False
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Question 107

True/False

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Question Owners' equity is the residual interest that remains after deducting liabilities from stockholders' equity.
Answer
True
False
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Question 108

True/False

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Question If a company prepares a statement of stockholders' equity, net income is added to retained earnings on this statement.
Answer
True
False
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Question 109

True/False

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Question Stockholders’ equity is owners’ equity in a corporation.
Answer
True
False
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Page 15 of 32

Question 110

True/False

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Question The time period assumption assumes a company prepares financial statements every month.
Answer
True
False
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Question 111

True/False

0 points

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Question GAAP stands for Generally Accepted Auditing Procedures.
Answer
True
False
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Question 112

True/False

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Question Because market values are subjective, many assets are carried on the balance sheet at their acquisition cost.
Answer
True
False
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Question 113

True/False

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Question The term used to refer to an asset’s original cost is “historical cost.”
Answer
True
False
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Question 114

True/False

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Question The going concern assumption infers that a company will continue to operate indefinitely.
Answer
True
False
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Question 115

True/False

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Question A company in the process of liquidation meets the requirements under the going concern assumption.
Answer
True
False

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Question 116

True/False

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Question The International Accounting Standards Board (IASB) was created in order to develop worldwide accounting standards that
must be used for all financial statements prepared regardless of country.
Answer
True
False
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Question 117

True/False

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Question The primary objective of external auditors is to provide assurance to stockholders and other users that the statements are

fairly presented.
Answer
True
False
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Question 118

True/False

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Question The independent auditor's report conveys whether or not the business is a good investment.
Answer
True
False
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Question 119

True/False

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Question The IASB is a branch of the FASB.
Answer
True
False
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Question 120

True/False

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Question Information must be timely to be relevant.
Answer
True
False
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Question 121

True/False

0 points

Question According to the accounting profession, the purpose of financial reporting is to provide
information about a company that investors, lenders, and other creditors can use when
deciding whether to provide resources to the entity.
Answer
True

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Page 16 of 32

False
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Question 122

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Question ______________________ consists of all activities necessary to provide the members
of an economic system with goods and services.
Answer
Business

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Question 123

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Question A ____________ is a certificate that represents a corporation’s promise to repay a certain amount of money and interest in
the future.
Answer
bond
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Question 124

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Question _____________ is the type of accounting used by nonbusiness entities.
Answer

Fund accounting
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Question 125

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Question Owners of corporations are called ____________________.
Answer
stockholders
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Question 126

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Question The three types of business activities in which all corporations engage are _______________________,
______________________, and _____________________.

Answer
financing, investing, operating
financing, operating, investing
operating, financing, investing
operating, investing, financing
investing, financing, operating
investing, operating, financing
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Question 127

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Question The process of identifying, measuring, and communicating economic information to various users is called
____________________.
Answer
accounting
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Question 128

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Question The names of the four financial statements are ________________________________,
________________________________, ________________________________, and ________________________________
Answer
income statement, balance sheet, statement of retained earnings, statement of cash flows
income statement, balance sheet, statement of cash flows, statement of retained earnings
income statement, stat
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Question 129

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Question Another name for profits or earnings of a business is _________________________.
Answer
net income
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Question 130

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Question The various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate
the preparation of financial statements are called __________________________________________________.
Answer
generally accepted accounting principles
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Question 131

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Question The concept that assumes that assets are recorded at the amount to acquire them is called the
_________________________.
Answer
cost principle
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Question 132

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Question The concept that assumes that an entity is not in the process of liquidation is _________________________.
Answer
going concern
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Question 133

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Question The federal government agency with the ultimate authority to determine the rules in preparing statements for companies
whose stock is sold to the public is the __________________________________________________.
Answer
Securities and Exchange Commission
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Question 134

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Question The private sector group with authority to set accounting standards is the
__________________________________________________.
Answer
Financial Accounting Standards Board
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Question 135

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Question ___________________ means the presentation of information is free from bias toward a particular result.
Answer
Neutrality
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Question 136

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Question In 2002, Congress passed the ________________ Act to bring reform to corporate accountability and stewardship in the
wake of a number of major corporate scandals.
Answer
Sarbanes-Oxley
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Question 137

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Question Good quality information should be both _____________ and present a __________________.
Answer
relevant
faithful representation
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Question 138

Matching

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Question Match the following business forms with their characteristics below.
Answer Match Question Items
Answer Items
C. C. A. B. A. B. C. C. -

A.
B.
C.
D.
E.
F.
G.
H.

Must file articles of incorporation with the state
A. Sole proprietorship
Easy to raise large sums of money
B. Partnership
Single owner
C. Corporation
Need an agreement about contributions to the business
Usually owned and operated by the same person
Owned by two or more individuals
Control most private resources in the U.S.
A share of stock acts as evidence of ownership
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Question 139

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Question Provided below is a list of important users of accounting information. Below the list are descriptions of a major need of each
of the various users. Fill in the blank with the one user group that is most likely to have the need described to the right of the blank.
Some user groups may be used more than once or not at all.
Answer
Match Question Items
Answer Items

A. - A. The prospects for future dividend payments.
F. - B. The financial status of a company issuing securities to the public for the
first time.
E. - C. The profitability of the company based upon the Internal Revenue Code.
B. - D. The profitability of each division of the company.
B. - E. The exact amount of profit on each product of the company.
G. - F. The company’s profitability since the last work force contract was
signed.

A. Stockholder
B. Company management
C. Supplier
D. Banker
E. Internal Revenue Service
F. Securities and Exchange
Commission
G. Labor union
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Question 140

Matching

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Question For each statement provided, choose the letter of the appropriate term from the list that each statement best describes.

Some terms may be used more than once, while others are not used at all.
Answer Match Question Items
Answer Items
H. - A. The portion of owner’s equity that represents the net income less any dividends paid
over the life of the entity.
C. - B. The owners’ claims on the assets of an entity.
E. - C. A distribution of the net income of a business to its owners.
L. - D. The sale of goods or the performance of services.
A. - E. A category on the balance sheet to indicate the owners’ direct investment in a
corporation.
G. - F. The cost of doing business that results from the process of generating revenues.
B. D. M. I. J. K. -

A. Capital stock
B.
C.
D.
E.

Asset
Owners’ equity
Time period
Dividends

F. Economic entity
concept
G. A future benefit.
G. Expense
H. An artificial segment on the calendar used as a basis for preparing financial statements. H. Retained earnings
I. The assumption that an entity is not in the process of liquidation and that it will continue I. Cost principle

indefinitely.
J. The principle or rule that specifies the amount recorded for an asset upon acquisition.
J. Creditor
K. An entity that lends a company money with the expectation of repayment.
K. Liability
L. Claims of the creditors against the assets of a company.
L. Revenue
M. Going concern
N. Monetary unit
O. Corporation
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Question 141

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Question Several items from the financial statements of Standard Tires are listed below. Use the following answer choices to identify
the type of account for each item listed. Place your answers in the space provided.


Page 18 of 32

Answer

Match
A. C. B. C. D. A. E. B. A. E. A. -

Question Items
Answer Items
A. Property, plant, and equipment A. Assets
B. Sale of tires
B. Liabilities
C. Accounts payable
C. Revenues
D. Interest income
D. Expenses
E. Selling expenses
E. Owners’ equity
F. Accounts receivable
G. Capital stock
H. Long-term debt
I. Cash
J. Retained earnings
K. Inventories
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Question 142

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Question Three organizations important to accounting are listed below. Select the organization that most closely achieves the role
described.
Answer Match Question Items
Answer Items
B. - A. Issues financial accounting concepts that are used as a guide to
accounting standard setting.
C. - B. Has the ultimate authority to set accounting standards, but has
allowed the profession to do so.
A. - C. Prepares and grades the Uniform CPA Examination.
C. A. B. C. -

A. American Institute of Certified Public
Accountants (AICPA)
B. Financial Accounting Standards Board
(FASB)
C. Securities and Exchange Commission
(SEC)

D. An agency of the federal government.
E. Is a professional organization of certified public accountants.
F. Primarily responsible for setting accounting standards today.
G. Requires that publicly traded companies file annual and quarterly
financial statements on a timely basis.
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Question 143

Multiple Answer

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Question Choose the user group that is most likely to have the need listed below. (Select all that apply.)
The ability of the company to pay its debts as they become due.
Answer
Stockholder
Company management
Supplier
Banker
Internal Revenue Service
Securities and Exchange Commission
Labor union
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Question 144

Essay

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Question Macon Corporation has been in the business of delivering small packages for local companies within the city of Atlanta,

Georgia, since 1960. The following information concerning financial activities during 2014 is available at December 31, 2014:
Delivery revenue
Dividends declared and paid
Buildings
Accounts payable
Capital stock
Water, gas, and
electricity
Cash

$280,000
85,000
140,000
30,000
105,000
28,000
56,000

Salary and wage expense
Rent expense
Land
Accounts payable
Retained earnings,
January 1, 2014
Notes payable
Income tax expense

$82,000
43,000
60,000

30,000
42,000
34,000
18,000

A.
B.

Prepare an income statement for the year ended December 31, 2014.
If you were a bank loan officer and Macon Corporation wanted to borrow $100,000 from your bank, would you lend the
money? Explain.
C.
Calculate retained earnings at December 31, 2014.
Answer A.
Macon Corporation
Income Statement
Year Ended December 31, 2014
Revenues:
Delivery revenue
$280,000
Expenses:
Salary and wage expense
$82,000
Rent expense
43,000
Water, gas, and electricity
28,000
Income tax expense
18,000
171,000

Net income
$109,000
B.
C.

The company appears profitable. Basing the decision solely on profitability, it appears the company can generate
operating income to enable it to repay the loan. But the company also had accounts payable and notes payable of
$30,000 and $34,000, respectively, for which cash may not be available to pay when these amounts become due.
$42,000 + $109,000 - $85,000 = $66,000
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Question 145

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Question Meredith Corporation is in the business of providing dog and cat grooming services to customers within the city of New York.
The following information concerning financial activities during 2014 is available at December 31, 2014:
Grooming revenue
Dividends declared and paid
Equipment
Accounts payable

$130,000
13,000

40,000
30,000

Salary and wage expense
Rent expense
Furniture
Accounts receivable

$44,000
24,000
60,000
23,000


Page 19 of 32

Capital stock
Utilities expense
Cash
A.
B.
C.

22,000
10,000
33,000

Retained earnings, Jan. 1, 2014
Notes payable
Income tax expense

21,000
88,000
7,000

Calculate net income for 2014.
Prepare a statement of retained earnings for the year ended December 31, 2014.
What information can you derive from the statement of retained earnings concerning this company? Explain.

Answer A.
B.

$130,000 - $10,000 - $44,000 - $24,000 - $7,000 = $45,000
Meredith Corporation
Statement of Retained Earnings
For the Year Ended December 31, 2014

Beginning balance
Add: Net income for the year
Less: Dividends for the year
Ending balance
C.

$21,000
45,000
(13,000)
$53,000

The statement of retained earnings provides information on the changes in retained earnings during 2014.
Net income causes retained earnings to increase, and dividends cause it to decrease. Since net income

exceeded dividends paid, the ending balance is larger than the beginning balance.
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Question 146

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Question Here is a list of accounts and their balances that appear on the Thomas Company’s income statement and balance sheet.
Accounts payable
Accounts receivable
Building
Cash
Gas, utilities, and other expenses
Land
Lawn-care revenue
Notes payable
Salaries and wages expense
Tools
Tree-trimming revenue
Truck

$ 800
500
2,000

3,300
300
4,000
1,500
6,000
900
800
500
2,000

REQUIRED:
Identify which of these are:
(a) Assets
(b) Liabilities
(c) Expenses
(d) Revenues
Answer
(a) Assets: Accounts receivable, Building, Cash, Land, Tools, Truck
(b) Liabilities: Accounts payable, Notes payable
(c) Expenses: Gas, utilities, and other expenses, Salaries and wages expense
(d) Revenues: Lawn-care revenue, Tree-trimming revenue
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Question 147

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Question Taryn Corporation
The accountant for Taryn Corporation prepared the following list of account balances from the company’s records for the year ended
December 31, 2014:
Sales revenue
Accounts receivable
Equipment
Accounts payable
Salaries and wages expense
Inventories
Income taxes payable
Notes payable

$165,000
14,000
42,000
12,000
40,000
22,000
5,000
20,000

Cash
Selling expenses
Common stock
Interest income
Cost of sales
Prepaid expenses

Income taxes expense
Retained earnings

$ 30,000
44,000
41,000
3,000
51,000
2,000
18,000
?

Read the information for Taryn Corporation. Determine the following amounts for Taryn Corp.
A)

Total assets at the end of 2014

B)

Total liabilities at the end of 2014

C)

What parties have a claim on Taryn Corporation’s assets? Explain you answer in the terms of the accounting equation.

Answer A)

$110,000
($30,000 Cash + $14,000 Accounts Receivable + $42,000 Equipment + $22,000 Inventories + 2,000 Prepaid
Expenses = $110,000)

B)

$37,000
($12,000 Accounts Payable + $5,000 Income Taxes Payable + $20,000 Notes Payable = $37,000)

C)

Both the creditors and the owners have a claim on the assets of the corporation. The creditors have their claim
arising from the liabilities of the corporation, while the owners have a claim through the owners’ (or stockholders’)
equity.
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Question 148

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Question Taryn Corporation
The accountant for Taryn Corporation prepared the following list of account balances from the company’s records for the year ended
December 31, 2014:
Sales revenue
Accounts receivable
Equipment

$165,000
14,000
42,000

Cash
Selling expenses
Common stock

$ 30,000
44,000
41,000


Page 20 of 32

Accounts payable
Salaries and wages expense
Inventories
Income taxes payable
Notes payable

12,000
40,000
22,000
5,000
20,000

Interest income
Cost of sales
Prepaid expenses

Income taxes expense
Retained earnings

3,000
51,000
2,000
18,000
?

Read the information for Taryn Corporation. Determine the following amounts for Taryn Corporation.
A)

The balance of retained earnings at the end of 2014.

B)

The total stockholders’ equity at the end of 2014.

C)

Name the two events that might cause stockholders’ equity to increase.

Answer A)

$32,000
($110,000 Total Assets - $37,000 Total Liabilities - $41,000 Common Stock = $32,000)

B)

$73,000

($110,000 Total Assets - $37,000 Total Liabilities = $73,000; OR $41,000 Common Stock + $32,000 Retained
Earnings = $73,000)

C)

Stockholders equity can increase when common (or capital) stock is issued to investors. It also can increase
through increases to retained earnings when the net income of the business is greater than any dividends paid to
the shareholders.
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Question 149

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Question Taryn Corporation
The accountant for Taryn Corporation prepared the following list of account balances from the company’s records for the year ended
December 31, 2014:
Sales revenue
Accounts receivable
Equipment
Accounts payable
Salaries and wages expense
Inventories
Income taxes payable

Notes payable

$165,000
14,000
42,000
12,000
40,000
22,000
5,000
20,000

Cash
Selling expenses
Common stock
Interest income
Cost of sales
Prepaid expenses
Income taxes expense
Retained earnings

$ 30,000
44,000
41,000
3,000
51,000
2,000
18,000
?

Read the information for Taryn Corporation. Prepare an income statement for Taryn Corporation in good form.

Answer
Taryn Corporation
Income Statement
For the Year Ended December 31, 2014
Revenues:
Sales revenue
$165,000
Interest income
3,000
$168,000
Expenses:
Cost of sales
$ 51,000
Salaries and wages expense
40,000
Selling expenses
44,000
153,000
Income taxes expense
18,000
Net income
$ 15,000
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Question 150

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Question Taryn Corporation
The accountant for Taryn Corporation prepared the following list of account balances from the company’s records for the year ended
December 31, 2014:
Sales revenue
Accounts receivable
Equipment
Accounts payable
Salaries and wages expense
Inventories
Income taxes payable
Notes payable

$165,000
14,000
42,000
12,000
40,000
22,000
5,000
20,000

Cash
Selling expenses
Common stock
Interest income
Cost of sales

Prepaid expenses
Income taxes expense
Retained earnings

$ 30,000
44,000
41,000
3,000
51,000
2,000
18,000
?

Read the information for Taryn Corporation. Prepare a balance sheet for Taryn Corporation in good form.
Answer
Taryn Corporation
Balance Sheet
December 31, 2014
Assets
Liabilities & Owners’ Equity
Cash
$ 30,000Accounts payable
Accounts receivable
14,000Income taxes payable
Inventories
22,000Notes payable
Prepaid expenses
2,000Common stock
Equipment
42,000Retained Earnings

Total liabilities and
Total assets
$ 110,000 owners’ equity

$

12,000
5,000
20,000
41,000
32,000

$ 110,000

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Question 151

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Question Taryn Corporation
The accountant for Taryn Corporation prepared the following list of account balances from the company’s records for the year ended

Page 21 of 32

December 31, 2014:
Sales revenue
Accounts receivable
Equipment
Accounts payable
Salaries and wages expense
Inventories
Income taxes payable
Notes payable

$165,000
14,000
42,000
12,000
40,000
22,000
5,000
20,000

Cash
Selling expenses
Common stock
Interest income
Cost of sales
Prepaid expenses
Income taxes expense
Retained earnings

$ 30,000
44,000
41,000
3,000
51,000
2,000
18,000
?

Read the information for Taryn Corporation. Determine the following amounts for Taryn Corporation:
A)

Total revenues for 2014.

B)

Total expenses for 2014.

C)

What is the purpose of the income statement?

D)

Is Taryn Corp. profitable? Explain your answer.

E)

Is this the first year of operations for Taryn Corp.? Explain your answer.

Answer A)

$168,000
($165,000 Sales Revenue + $3,000 Interest Income = $168,000)

B)

$153,000
($51,000 Cost of Sales + $40,000 Salaries & Wages Expense + $44,000 Selling Expenses + $18,000 Income
Taxes Expense = $153,000)

C)

The purpose of the income statement is to provide information regarding the revenues and expenses of the entity.
The difference shows the profitability of the company for a particular period of time.

D)

Taryn Corporation had net income for the period of $15,000. Since revenues exceeded expenses for the period, the
company would be considered profitable.

E)

This would not be the first year of operations for Taryn Corporation. The reasons for this are that the ending
Retained Earnings balance is greater than the net income of $15,000. Since the ending balance of Retained
Earnings is $32,000, and Net Income for the period was $15,000 as well as apparently no dividends declared and
paid to the stockholders during the year, Taryn Corporation began the year with a balance of $17,000 ($32,000 $15,000) in Retained Earnings.
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Question 152

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Question Canyon Corporation
The accountant for the Canyon Corporation prepared the following list from the company’s accounting records for the year ended
December 31, 2014:
Retained earnings
Cash
Accounts payable
Sales revenue
Cost of sales
Land
Notes payable
Inventory

$

?
7,000
15,000
125,000
70,000
75,000
15,000

20,000

Prepaid expenses
Common stock
Accounts receivable
Interest income
Salary expense
Income tax expense
Selling expense
Salaries payable

$

3,000
40,000
17,000
500
4,000
200
45,000
5,000

Read the information for Canyon Corporation. Determine the following amounts for Canyon Corporation.
A)

Total assets at the end of 2014.

B)

Total liabilities at the end of 2014.

C)

Total equity at the end of 2014.

Answer

A)

$122,000
($3,000 Prepaid Expenses + $7,000 Cash + $17,000 Accounts Receivable + $75,000 Land + $20,000
Inventory = $122,000)

B)

$35,000
($15,000 Accounts Payable + $15,000 Notes Payable + $5,000 Salaries Payable = $35,000)

C)

$87,000
($122,000 Total Assets - $35,000 Total Liabilities = $87,000)
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Question 153

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Question Canyon Corporation
The accountant for the Canyon Corporation prepared the following list from the company’s accounting records for the year ended
December 31, 2014:
Retained earnings
Cash
Accounts payable
Sales revenue
Cost of sales
Land
Notes payable
Inventory

$

?
7,000
15,000
125,000
70,000
75,000
15,000
20,000

Prepaid expenses
Common stock
Accounts receivable

Interest income
Salary expense
Income tax expense
Selling expense
Salaries payable

Read the information for Canyon Corporation. Determine the following amounts for Canyon Corporation:
A)

Total revenues for 2014.

$

3,000
40,000
17,000
500
4,000
200
45,000
5,000


Page 22 of 32

B)

Total expenses for 2014.

C)

Net income for 2014.

Answer

A)

$125,500
($125,000 Sales Revenue + $500 Interest Income = $125,500)

B)

$119,200
($70,000 Cost of Sales + $4,000 Salary Expense + $200 Income Tax Expense + $45,000
Selling Expense = $119,200)

C)

$6,300
($125,500 Total Revenue - $119,200 Total Expenses = $6,300)
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Question 154

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Question Canyon Corporation
The accountant for the Canyon Corporation prepared the following list from the company’s accounting records for the year ended
December 31, 2014:
Retained earnings
Cash
Accounts payable
Sales revenue
Cost of sales
Land
Notes payable
Inventory

$

?
7,000
15,000
125,000
70,000
75,000
15,000
20,000

Prepaid expenses
Common stock
Accounts receivable
Interest income
Salary expense

Income tax expense
Selling expense
Salaries payable

$

3,000
40,000
17,000
500
4,000
200
45,000
5,000

Read the information for Canyon Corporation. Determine the following amounts for Canyon Corporation:
A)

Stockholders’ equity at the end of 2014.

B)

Retained earnings at the end of 2014.

C)

Name two events that might cause stockholders’ equity to decrease.

Answer A)

$87,000
($122,000 Total Assets - $35,000 Total Liabilities = $87,000)

B)

$47,000
($87,000 Total Stockholders’ Equity - $40,000 Common Stock = $47,000

C)

Stockholders’ equity is decreased when dividends are declared and paid. Expenses or net losses also reduce
stockholders’ equity.
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Question 155

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Question Canyon Corporation
The accountant for the Canyon Corporation prepared the following list from the company’s accounting records for the year ended
December 31, 2014:
Retained earnings
Cash
Accounts payable

Sales revenue
Cost of sales
Land
Notes payable
Inventory

$

?
7,000
15,000
125,000
70,000
75,000
15,000
20,000

Prepaid expenses
Common stock
Accounts receivable
Interest income
Salary expense
Income tax expense
Selling expense
Salaries payable

$

3,000
40,000

17,000
500
4,000
200
45,000
5,000

Read the information for Canyon Corporation. Using good form, prepare an income statement for Canyon Corporation.
Answer
Canyon Corporation
Income Statement
For the Year Ended December 31, 2014
Revenues:
Sales Revenue
$125,000
Interest Income
500
$125,500
Expenses:
Cost of Sales
$ 70,000
Selling Expense
45,000
Salary Expense
4,000
Income tax Expense
200
119,200
Net Income
$ 6,300

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Question 156

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Question Canyon Corporation
The accountant for the Canyon Corporation prepared the following list from the company’s accounting records for the year ended
December 31, 2014:
Retained earnings
Cash
Accounts payable
Sales revenue
Cost of sales
Land
Notes payable
Inventory

$

?
7,000
15,000
125,000

70,000
75,000
15,000
20,000

Prepaid expenses
Common stock
Accounts receivable
Interest income
Salary expense
Income tax expense
Selling expense
Salaries payable

Read the information for Canyon Corporation. Using good form, prepare a Balance Sheet for the Canyon Corporation.

$

3,000
40,000
17,000
500
4,000
200
45,000
5,000


Page 23 of 32

Answer
Canyon Corporation
Balance Sheet
December 31, 2014
Assets
Cash
Accounts receivable
Inventory
Prepaid expenses
Land

$

Total assets

$122,000

Liabilities and Owners’ Equity
Accounts payable
$ 15,000
Salaries payable
5,000
Notes payable
15,000
Common stock
40,000
Retained earnings
47,000
Total liabilities and
owners’ equity

$122,000

7,000
17,000
20,000
3,000
75,000

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Question 157

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Question Assume that you have received copies of the financial statements for PepsiCo for the years ending December 31, 2014 and
2013. Answer the following questions:
A)

If you were a banker, why would you need information from PepsiCo’s financial statements?

B)

If you were a potential investor in PepsiCo stock, what information would you want from their financial statements?

C)

If you were a labor negotiator for a union that represents a group of PepsiCo’s employees, which financial statement
would provide you with the most useful information?
Answer A)
A banker wants to be assured that the company will make its interest payments and repay the principle of the
loan in a timely manner.
B)

Investors want to know whether they should make an investment in the company’s stock, or continue to hold their
investment. They will be looking at the company’s recent performance, whether the company has been
profitable, how their profits compare with other companies, and how much the company has declared and paid in
dividends.

C)

A labor negotiator needs to know how much profit the company has made. This information is found on the
Income Statement.
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Question 158

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Question Target, Inc., started the year with total assets of $400,000 and total liabilities of $240,000. Net income for the year is
$120,000 and dividends declared and paid during the year are $90,000.
A) What is the amount of Target’s total stockholders’ equity at the end of the year?
B) Could Target have paid additional dividends during the year? Explain your answer.
$190,000
Answer A)
($400,000 Total Assets at the beginning of the year - $240,000 Total Liabilities at the
beginning of the year = $160,000 Total Equity at the beginning of the year)
($160,000 Total Equity at the beginning of the year + $120,000 Net Income for the year $90,000 Dividends declared and paid during the year = $190,000)
B)

Yes. Assuming the company has enough cash to do so, dividends can be paid. Net income exceeded the
amount of dividends paid by $30,000 ($120,000 - $90,000), so the amount paid could have been increased. Also
the company has total positive retained earnings.
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Question 159

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Question Ramos Corp. started business at the beginning of the year, with assets of $600,000 and stockholders' equity of $240,000. By
the end of the year, assets increased by $80,000 and liabilities increased by $60,000. Other than net income or loss, the only change in
stockholders' equity was dividends declared and paid of $55,000.
A) What was the amount of Ramos Corp. stockholders’ equity at the end of the year?

B) What was the amount of Ramos Corp. net income or net loss for the year?
Answer
A)
Assets
Beginning of year
$600,000
Change during year
+80,000
End of year
$680,000

=

Liabilities
$360,000
+60,000
$420,000

Stockholders’ Equity
$240,000
+20,000
$260,000

B)
Change in equity
Add: Dividends
Net Income

$20,000
55,000

$75,000
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Question 160

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Question Presented below are selected data from the balance sheet of Farmer Company for 2014. The figures are expressed in
millions.
Total Current assets
Property, plant, and equipment
Other assets
Total Current liabilities
Total Long-term debt
Total Stockholders’ equity

$

5,572
16,325
?
3,274
5,632
19,639

A)

Determine the amount of “Other assets” for Farmer’s 2014 balance sheet. (HINT: you must use the accounting
equation concept to determine your answer.)

B)

How much of Farmer Company is financed by creditors? How much is financed by the owners?


Page 24 of 32

Answer

A)

$6,648
($3,274 Current liabilities + $5,632 Long-term debt + $19,639 Stockholders’ equity =
$28,545 Total Assets)
($28,545 Total Assets - $5,572 Current assets - 16,325 Property, plant & equipment =
$6,648)

B)

Amount of financing by creditors: $8,906 or 31.2%
($3,274 Current liabilities + $5,632 Long-term debt = $8,906)
Amount of financing by owners: $19,639 or 68.8%
($19,639 Stockholders’ equity)
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Question 161

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Question Presented below are selected data from the accounting records for Micco’s Gift Store for 2014.
Net sales
Income taxes
Cost of sales
Operating expenses
Dividends

$ 190,000
30,000
80,000
45,000
12,000

A)

Calculate the net income or loss for 2014.

B)

Explain how the amount from part “A” will affect the financial position of Micco’s Gift Store.

Is the company profitable? Explain your answer.
C)
Answer A)
$35,000
($190,000 Net sales - $30,000 Income taxes - $80,000 Cost of sales - $45,000 Operating expenses =
$35,000)
B)

Net income will improve the company’s financial position.

C)

Yes. The amount of revenues exceeds the amount of expenses by $35,000.
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Question 162

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Question The following information comes from the records of Morton Corporation. Assume no additional investment by owners when
answering the following questions:
Liabilities

Owners’ Equity
Assets
January 1, 2014
$ 98,000
$ 54,000
$
December 31, 2014
131,000
84,000
A)

What is the amount of owners’ equity at January 1, 2014?

__________________

B)

What is the amount of liabilities at December 31, 2014?

__________________

C)

Assume that the company declared and paid dividends of $22,000 during the year. How much net income did it earn during
the year?

D)

Assume that the company paid no dividends during the year. Without looking at the income statement, how can you tell if
the company is profitable or not?

Answer A)
$44,000
($98,000 Assets - $54,000 Liabilities = $44,000)
B)

$47,000
($131,000 Assets - $84,000 Owners’ Equity = $47,000)

C)

$62,000
($44,000 Beginning Owners’ Equity + X - $22,000 Dividend = $84,000 Ending Owners’ Equity)
(X = $106,000 - 44,000 = $62,000)

D)

Assuming that the increase in owners’ equity would come from net income, the company would have to be considered
profitable. Net income will increase retained earnings which is a part of owners’ equity
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Question 163

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Question Avery Corporation began the year with total assets of $800,000 and total liabilities of $620,000. Use the accounting equation
to answer the following questions. Assume no additional investment by owners when answering these questions.
A)

What was the amount of Avery’s total assets at the end of the year if liabilities decreased by $60,000 and owners’ equity
increased by $90,000?

B)
Answer

Was the company profitable? Explain your answer.
A)
$830,000
Assets
$800,000
30,000
$830,000

Beginning of the year
Change during the year
End of the year
B)

Liabilities
$620,000
(60,000)
$560,000

Owners’ Equity
$180,000

90,000
$270,000

The company was profitable because the owners’ equity increased from the beginning of the year to the end of
the year.
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Question 164

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Question The beginning balance of retained earnings was $630,000, and the ending balance was $650,000. The company declared
and paid dividends of $60,000.
A) Determine the amount of net income for the year.
B) What information would one find on the income statement in addition to net income?
$80,000
Answer A)
($650,000 Ending Retained Earnings - $630,000 Beginning Retained Earnings = $20,000)
($20,000 + $60,000 Dividends = $80,000)


Page 25 of 32

B)

The Income Statement will show the sources of amounts earned (Revenues) as well as the amount and type of
costs incurred by the company (Expenses) during the period.
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Question 165

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Question The Trenton Corporation began 2014 with $390,000 in assets, $140,000 in liabilities, and $170,000 of retained earnings. Net
income for the year was $120,000, and dividends of $110,000 were declared and paid.
A)

Prepare a statement of retained earnings for 2014.

B)

What is the nature or purpose of the statement of retained earnings?

C)

What was the amount of capital stock for Trenton Corporation at the beginning of 2014?

D)

Identify what business events might occur in Trenton Corp.’s business operations that would cause the two stockholders’
equity items to increase.

E)

How do you identify whether Trenton was profitable during 2014 by examining the statement of retained earnings?

Answer A)
Trenton Corporation
Statement of Retained Earnings
For the Year Ended December 31, 2014
Beginning balance
Add: Net income for the year
Deduct: Dividends for the year
Ending balance

$170,000
120,000
(110,000)
$180,000

B)

The statement of retained earnings explains the change in retained earnings during a period.

C)

$80,000
($390,000 Total Assets - $140,000 Total Liabilities - $170,000 Beginning Retained

Earnings = $80,000)

D)

One way that the company can increase stockholders’ equity is to sell additional shares of stock. Retained
earnings will increase when the company reports net income for the period greater than the dividends paid.

E)

The statement of retained earnings shows that the company was profitable for the year by reporting net income
for the period. If the company were to experience an operating loss, then this would be shown as a deduction
from the beginning balance of retained earnings.
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Question Below are several accounts from Costello Company's accounting records. Answer the questions that follow.
Total liabilities, end of the year
Capital stock, end of the year

$92,000
16,000

Total assets, end of the year
Retained earnings,
beginning of the year

$143,000
15,000

Dividends declared and paid for the period
20,000

Net income

40,000

A)

How much is the balance of retained earnings at the end of the year?

B)

Show the accounting equation for Costello Company at the end of the year with the respective dollar amounts.

C)

If stockholders’ equity increases during the year, does that mean that the company is profitable? Explain your answer.

Answer A)

$35,000

($15,000 Retained earnings, beginning of the year + $40,000 Net income - $20,000
Dividends for the period = $35,000) OR
($143,000 Total assets, end of the year - $92,000 Total liabilities, end of the year $16,000 Capital stock, end of the year = $35,000)

B)

$143,000 Total assets, end of the year = $92,000 Total liabilities, end of the year +
$51,000 Owners’ Equity, end of the year ($16,000 Capital stock, end of the year +
$35,000 Retained earnings, end of the year)

C)

This would depend upon what causes the stockholders’ equity to increase. If the increase were due to an
increase in retained earnings, then the company would have been profitable for the period. But if the increase
were due to an increase in the amount of capital stock issued, this would not be a measure of profitability.
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Question 167

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Question Classify the following items according to the financial statement on which each belongs, either the income statement (IS) or
the balance sheet (BS). Also indicate whether each is a revenue (R), expense (E), asset (A), liability (L), or owners' equity (OE) item.
Appears on Which Statement?

Type of Account

1.

Retained earnings

_________________

_________________

2.

Buildings

_________________

_________________

3.

Common stock

_________________

_________________

4.

Accounts payable

_________________

_________________

5.

Football ticket sales

_________________

_________________

6.

Salaries expense

_________________

_________________

_________________
1. BS
OE
2. BS
A
3. BS
OE
4. BS
L

5. IS
R

_________________

7.
Accounts receivable
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